Disruptive change. When trying harder is part of the problem

When a company faces a major disruption in its markets, managers' perceptions of the disruption influence how they respond to it. If, for instance, they view the disruption as a threat to their core business, managers tend to overreact, committing too many resources too quickly. But if they see it as an opportunity, they're likely to commit insufficient resources to its development. Clark Gilbert and Joseph Bower explain why thinking in such stark terms--threat or opportunity--is dangerous. It's possible, they argue, to arrive at an organizational framing that makes good use of the adrenaline a threat creates as well as of the creativity an opportunity affords. The authors claim that the most successful companies frame the challenge differently at different times: When resources are being allocated, managers see the disruptive innovation as a threat. But when the hard strategic work of discovering and responding to new markets begins, the disruptive innovation is treated as an opportunity. The ability to reframe the disruptive technology as circumstances evolve is not an easy skill to master, the authors admit. In fact, it might not be possible without adjusting the organizational structure and the processes governing new business funding. Successful companies, the authors have determined, tend to do certain things: They establish a new venture separate from the core business; they fund the venture in stages as markets emerge; they don't rely on employees from the core organization to staff the new business; and they appoint an active integrator to manage the tensions between the two organizations, to name a few. This article will help executives frame innovations in more balanced ways--allowing them to recognize threats but also to seize opportunities.     

Deep change. How operational innovation can transform your company

Breakthrough innovations--not just steady improvements--in operations can destroy competitors and shake up entire industries. Just look at Dell, Toyota, and Wal-Mart. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Why? One reason, contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. In addition, many executives who rose through the ranks of finance or sales aren't familiar with operations--and they aren't interested in learning more. Finally, because no one holds the title Vice President of Operational Innovation, it doesn't have a natural home in the organization, so it's easily overlooked. Fortunately, all of these barriers can be overcome. This article offers practical advice on how to develop operational innovations, such as looking for role models outside your industry to emulate and identifying--and then defying--constraining assumptions about how work should be done. The author also discusses the best way to implement operational innovations. For instance, because they are disruptive by nature, projects should be concentrated in those activities with the greatest impact on enterprise strategic goals. Operational innovation may feel unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. Executives who understand how operational innovation happens--and who understand the barriers that prevent it from happening--can add to their strategic arsenal one of the most powerful competitive weapons in existence. In an economy that has overdosed on hype and in which customers rule as never before, operational innovation offers a meaningful and sustainable way to get ahead--and stay ahead--of the pack.     

Mapping your innovation strategy

In the complex sport of American football, teams rely on playbooks as thick as the Manhattan phone directory. But when it comes to creating innovative growth businesses-which is at least as complicated as professional football--most companies have not developed detailed game plans. Indeed, many managers have concluded that a fog enshrouds the world of innovation, obscuring high-potential opportunities. The authors believe that companies can penetrate that fog by developing growth strategies based on disruptive innovations, as defined by Clayton Christensen. Such innovations conform to a pattern: They offer an entirely new solution; they perform adequately along traditional dimensions and much better along other dimensions that matter more to target customers; and they are not initially appealing to powerful incumbents. Companies can develop customized checklists, or playbooks, by combining this basic pattern with analysis of major innovations in their markets. The key early on is to focus not on detailed financial estimates--which will always guide companies toward the markets most hostile to disruptive innovations--but on how well the innovation fits the pattern of success. It's also crucial to encourage flexibility: Companies must be willing to kill projects that are going nowhere, exempt innovations from standard development processes, and avoid burdening project teams with extra financing, which can keep them heading in the wrong direction. Companies can create competitive advantage by becoming champions at defining the pattern of successful innovations and executing against it. But as that pattern becomes obvious--and others emerge-building a sustainable advantage on innovation competencies will again prove elusive.     

Knowing a winning business idea when you see one

Identifying which business ideas have real commercial potential is fraught with uncertainty, and even the most admired companies have stumbled. It's not as if they don't know what the challenges of innovation are. A new product has to offer customers exceptional utility at an attractive price, and the company must be able to deliver it at a tidy profit. But the uncertainties surrounding innovation are so great that even the most insightful managers have a hard time evaluating the commercial readiness of new business ideas. In this article, W. Chan Kim and Renée Mauborgne introduce three tools that managers can use to help strip away some of that uncertainty. The first tool, "the buyer utility map," indicates how likely it is that customers will be attracted to a new business idea. The second, "the price corridor of the mass," identifies what price will unlock the greatest number of customers. And the third tool, "the business model guide," offers a framework for figuring out whether and how a company can profitably deliver the new idea at the targeted price. Applying the tools, though, is not the end of the story. Many innovations have to overcome adoption hurdles--strong resistance from stakeholders inside and outside the company. Often overlooked in the planning process, adoption hurdles can make or break the commercial viability of even the most powerful new ideas. The authors conclude by discussing how managers can head off negative reactions from stakeholders.     

Will disruptive innovations cure health care?

It's no secret that health care delivery is convoluted, expensive, and often deeply dissatisfying to consumers. But what is less obvious is that a way out of this crisis exists. Simpler alternatives to expensive care are already here--everything from $5 eyeglasses that people can use to correct their own vision to angioplasty instead of open-heart surgery. Just as the PC replaced the mainframe and the telephone replaced the telegraph operator, disruptive innovations are changing the landscape of health care. Nurse practitioners, general practitioners, and even patients can do things in less-expensive, decentralized settings that could once be performed only by expensive specialists in centralized, inconvenient locations. But established institutions--teaching hospitals, medical schools, insurance companies, and managed care facilities--are fighting these innovations tooth and nail. Instead of embracing change, they're turning the thumbscrews on their old processes--laying off workers, delaying payments, merging, and adding layers of overhead workers. Not only is this at the root of consumer dissatisfaction with the present system, it sows the seeds of its own destruction. The history of disruptive innovations tells us that incumbent institutions will be replaced with ones whose business models are appropriate to the new technologies and markets. Instead of working to preserve the existing systems, regulators, physicians, and pharmaceutical companies need to ask how they can enable more disruptive innovations to emerge. If the natural process of disruption is allowed to proceed, the result will be higher quality, lower cost, more convenient health care for everyone.     

The ambidextrous organization

Corporate executives must constantly look backward, attending to the products and processes of the past, while also gazing forward, preparing for the innovations that will define the future. This mental balancing act is one of the toughest of all managerial challenges--it requires executives to explore new opportunities even as they work diligently to exploit existing capabilities--and it's no surprise that few companies do it well. But as every businessperson knows, there are companies that do. What's their secret? These organizations separate their new, exploratory units from their traditional, exploitative ones, allowing them to have different processes, structures, and cultures; at the same time, they maintain tight links across units at the senior executive level. Such "ambidextrous organizations," as the authors call them, allow executives to pioneer radical or disruptive innovations while also pursuing incremental gains. Of utmost importance to the ambidextrous organization are ambidextrous managers--executives who have the ability to understand and be sensitive to the needs of very different kinds of businesses. They possess the attributes of rigorous cost cutters and free-thinking entrepreneurs while also maintaining the objectivity required to make difficult trade-offs. Almost every company needs to renew itself through the creation of breakthrough products and processes, but it shouldn't do so at the expense of its traditional business. Building an ambidextrous organization is by no means easy, but the structure itself, combining organizational separation with senior team integration, is not difficult to understand. Given the executive will to make it happen, any company can become ambidextrous.     

Strategy and the Internet

Many of the pioneers of Internet business, both dot-coms and established companies, have competed in ways that violate nearly every precept of good strategy. Rather than focus on profits, they have chased customers indiscriminately through discounting, channel incentives, and advertising. Rather than concentrate on delivering value that earns an attractive price from customers, they have pursued indirect revenues such as advertising and click-through fees. Rather than make trade-offs, they have rushed to offer every conceivable product or service. It did not have to be this way--and it does not have to be in the future. When it comes to reinforcing a distinctive strategy, Michael Porter argues, the Internet provides a better technological platform than previous generations of IT. Gaining competitive advantage does not require a radically new approach to business; it requires building on the proven principles of effective strategy. Porter argues that, contrary to recent thought, the Internet is not disruptive to most existing industries and established companies. It rarely nullifies important sources of competitive advantage in an industry; it often makes them even more valuable. And as all companies embrace Internet technology, the Internet itself will be neutralized as a source of advantage. Robust competitive advantages will arise instead from traditional strengths such as unique products, proprietary content, and distinctive physical activities. Internet technology may be able to fortify those advantages, but it is unlikely to supplant them. Porter debunks such Internet myths as first-mover advantage, the power of virtual companies, and the multiplying rewards of network effects. He disentangles the distorted signals from the marketplace, explains why the Internet complements rather than cannibalizes existing ways of doing business, and outlines strategic imperatives for dot-coms and traditional companies.     

The discipline of innovation.

As managers recognize the heightened importance of innovation to competitive success, they face an apparent paradox: the orderly and predictable decisions on which a business rests depend increasingly on the disorderly and unpredictable process of innovation. How can managers expect to plan for--or count on--a process that is itself so utterly dependent on creativity, inspiration, and old-fashioned luck? Drawing on his many years' experience studying innovative and entrepreneurial companies, the author argues that this paradox is apparent only, not real. Most of what happens in successful innovations is not the happy occurrence of a blinding flash of insight but, rather, the careful implementation of an unspectacular but systematic management discipline. At the heart of that discipline lies the knowledge of where to look for innovation opportunities and how to identify them. It is to this study of the sources of innovation that Mr. Drucker here addresses himself.     

Breaking out of the innovation box

In most companies, investments in innovation follow a boom-bust cycle. For a time, the cash flows. Then, as the economy sours or companies rethink their priorities, the taps go dry. But when research budgets are slashed, the strong projects are often abandoned along with the weak ones. Promising initiatives are cut off just when they are about to bear fruit. Expensive labs are closed; partnership agreements costing millions in legal fees are thrown away. When disruptive changes in the competitive landscape come, companies are caught flat-footed. Sustainable innovation requires a new approach: Instead of being largely isolated projects, innovation initiatives need to gain access to the insights and capabilities of other companies. To be protected from the ax of short-term cost reductions and the faddishness born of easy money, the initiatives must become part of the ongoing commerce that takes place among companies. But how can businesses traffic in such sensitive information without giving their competitors an advantage? The answer, the author contends, lies in a practice that's been common since the Middle Ages: the use of independent intermediaries to facilitate the exchange of sensitive information among companies without revealing the principals' identities or motives and without otherwise compromising their interests. Executive search firms, for example, allow job seekers to remain anonymous during the early stages of a search, and they protect businesses from disclosing their hiring plans to rivals. A network of innovation intermediaries would be in a unique position to visualize new opportunities synthesized from insights and technologies provided by several companies--ideas that might never occur to businesses working on their own.     

The 2001 HBR list. Breakthrough ideas for today's business agenda

Business is shaped by ideas. But how do you separate enduring ideas from passing fancies? In this, the first edition of the annual HBR List, our editors spotlight five break-through ideas that are truly shaping the future of business. EVEN A GREAT BUSINESS MODEL IS NOT ENOUGH: The rise and fall of dot-coms left markets reeling and CEOs scratching their heads. The most important lesson of the debacle: squishy thinking about "business models" is no substitute for a distinctive strategy. CHANGE IS CHANGING: In recent years, pundits have urged executives to incite revolutions within their companies. But a growing group of experts now suggests that the best companies actually evolve through incremental change--change that builds on rather than subverts their heritage. EGO MAKES THE LEADER: By looking deeply into executives' psyches, we are beginning to unlock the enigma of leadership. While there will never be a single recipe for successful corporate stewardship, an understanding of the human ego can shed light on leadership's most fundamental components. ONLY CONNECT: In business organizations, what's really important about people is not their individual skills but the relationships they form with one another. By investing in "social capital," companies can often push their performance to a whole new level. THE BIOLOGY CENTURY DAWNS: In the twentieth century, product innovations tended to spring from physics. But in the new century, biology may be the central source of innovation. From genomics to biomimicry, the study of life promises to change what companies sell and even how they operate.     

Effects of audit partners on clients’ business risk disclosure

We empirically investigate audit engagement partners’ involvement in business risk disclosure. Specifically, we examine whether the quality of business risk disclosure is influenced by engagement partner tenure and knowledge. We also examine whether the effects of partner tenure and knowledge are similar for Big 4 audit firms and non-Big 4 firms. Since fiscal year 2003, listed companies in Japan have been required to disclose business risk information. Although the business risk information is not audited, auditors concerned about their audit quality may seek to influence clients’ business risk disclosure practices. Giving advice to management on the narrative business risk disclosure can contribute to improving the perceived value of the auditor’s services which can be a competitive advantage. Using a sample of Japanese listed companies from 2003 to 2010, we find that if the engagement partners’ tenure is shorter, a company discloses more business risk information and the disclosure is more detailed. Furthermore, companies with audit partners who have a larger number of client engagements disclose larger amounts of business risk information in more detail. However, the engagement partner effects are mitigated if they belong to a Big 4 firm.     

Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio

Minor innovations make up most of a company's development portfolio, on average, but they never generate the growth companies seek. The solution, says Day--the Geoffrey T. Boisi Professor of Marketing and a codirector of the Mack Center for Technological Innovation at Wharton--is for companies to undertake a systematic, disciplined review of their innovation portfolios and increase the number of major innovations at an acceptable level of risk. Two tools can help them do this. The first, called the risk matrix, graphically reveals the distribution of risk across a company's entire innovation portfolio. The matrix allows companies to estimate each project's probability of success or failure, based on how big a stretch it is for the firm to undertake. The less familiar the product or technology and the intended market, the higher the risk. The second tool, dubbed the R-W-W (real-win-worth it) screen, allows companies to evaluate the risks and potential of individual projects by answering six fundamental questions about each one: Is the market real? Explores customers' needs, their willingness to buy, and the size of the potential market. Is the product real? Looks at the feasibility of producing the innovation. Can the product be competitive? and Can our company be competitive? Investigate how well suited the company's resources and management are to compete in the marketplace with the product. Will the product be profitable at an acceptable risk? Explores the financial analysis needed to assess an innovation's commercial viability. Last, Does launching the product make strategic sense? examines the project's fit with company strategy and whether management supports it.     

R&D comes to services. Bank of America's pathbreaking experiments

At the heart of business today lies a dilemma: Our economy is increasingly dependent on services, yet our innovation processes remain oriented toward products. Indeed, we have well-tested, scientific methods for developing and refining manufactured goods, but many of them don't seem applicable to the world of services. In this article, Harvard Business School professor Stefan Thomke points out the challenges of applying the discipline of formal R&D processes to services: Because a service often exists only in the moment of its delivery to a customer, it is difficult to isolate in a traditional laboratory. And since many services are tailored to individual buyers at the point of purchase, they can't be tested through large samples. As a result, experiments with new services are most useful when they are conducted live--with real customers engaged in real transactions. But live tests magnify the cost of failure; an experiment that doesn't work may harm customer relationships and even the brand. Given such challenges, it's no surprise that most service companies have not established rigorous, ongoing R&D processes, Thomke says. Here the author provides an in-depth look at a five-step process that Bank of America has used to create new service concepts for retail banking. The company has turned a set of its branches into, in effect, a laboratory where a corporate research team conducts service experiments with actual customers during regular business hours, compares results with those of control branches, and pinpoints attractive innovations for broader rollout. The author describes the program's workings, its successes, and the obstacles the bank faced. The effort reveals what a true R&D operation might look like inside a service business, he concludes.     

How CEOs manage growth agendas

When does it make sense for companies to grow from within? When is it better to gain new capabilities or access to markets by merging with or acquiring other companies? When should you sacrifice the bottom line in order to nurture the top line? In a thought-provoking series of essays, five executives--Kenneth Freeman of Quest Diagnostics, George Nolen of Siemens USA, John Tyson of Tyson Foods, Kenneth Lewis of Bank of America, and Robert Creifeld of Nasdaq--describe how they have approached top-line growth in various leadership roles throughout their careers. They write candidly about their struggles and successes along the way, relaying growth strategies as diverse as the companies and industries they represent. The leaders' different tactics have almost everything to do with their companies' particular strengths, weaknesses, and needs. Freeman, for instance, emphasizes the importance of knowing when to put on the brakes. When he first became CEO of Quest, he froze acquisitions for a few years so the company could focus on internal processes and "earn the right to grow." But for Greifeld, it's all about innovation, which "shakes up competitive stasis and propels even mature businesses forward." The executives agree, though, that companies can grow (and can do so profitably) by distinguishing their offerings from those of other organizations. As Ranjay Gulati of Northwestern's Kellogg School of Management points out in his introduction to the essays, no matter what strategies are in play,"it's important to remember that growth comes in many forms and takes patience.... The key is to be ready to act on whatever types of opportunities arise."     

IT doesn't matter

As information technology has grown in power and ubiquity, companies have come to view it as ever more critical to their success; their heavy spending on hardware and software clearly reflects that assumption. Chief executives routinely talk about information technology's strategic value, about how they can use IT to gain a competitive edge. But scarcity, not ubiquity, makes a business resource truly strategic--and allows companies to use it for a sustained competitive advantage. You only gain an edge over rivals by doing something that they can't. IT is the latest in a series of broadly adopted technologies--think of the railroad or the electric generator--that have reshaped industry over the past two centuries. For a brief time, as they were being built into the infrastructure of commerce, these technologies created powerful opportunities for forward-looking companies. But as their availability increased and their costs decreased, they became commodity inputs. From a strategic standpoint, they became invisible; they no longer mattered. that's exactly what's happening to IT, and the implications are profound. In this article, HBR's editor-at-large Nicholas Carr suggests that IT management should, frankly, become boring. It should focus on reducing risks, not increasing opportunities. For example, companies need to pay more attention to ensuring network and data security. Even more important, they need to manage IT costs more aggressively. IT may not help you gain a strategic advantage, but it could easily put you at a cost disadvantage. If, like many executives, you've begun to take a more defensive posture toward IT, spending more frugally and thinking more pragmatically, you're already on the right course. The challenge will be to maintain that discipline when the business cycle strengthens.     

Preparing for evil

How can you plan for every crisis that might occur, even for ones you can't imagine? The task seems so daunting and so limitless that many firms don't even start. In fact, as the authors' 20 years of research shows, three out of four Fortune 500 companies are prepared to handle only the types of calamities they've already suffered, and not even all of those. That's unfortunate because the research also shows that crisis-prepared companies fare better financially, have stronger reputations, and ultimately stay in business longer than their crisis prone counterparts. Crisis-prepared companies use a systematic approach to focus their efforts. In addition to planning for natural disasters, they divide man-made calamities into two sorts--accidental or "normal" ones, like the Exxon Valdez oil spill, and deliberate or "abnormal" ones, like product tampering. Then they take steps to broaden their thinking about such potential crises. They consider threats that would be common in other industries, for instance. And they seek input from outsiders such as investigative journalists and even reformed criminals. But if these companies think broadly about possible threats, they think narrowly about implementation. Each year, smart companies focus their resources and attention on a few facilities picked at random, just as airlines conduct detailed security checks on just a few passengers for each flight. That reduces the probability of an attack on the entire organization even as it allows the business to migrate steadily to a higher level of crisis readiness. Crisis-prepared companies know that disasters cannot be managed through cost-benefit analyses. It is precisely because the effects of a disaster cannot be predicted or controlled that smart companies focus their efforts on preventing crises rather than containing them after the fact.     

The discipline of innovation

Some innovations spring from a flash of genius. But as Peter Drucker points out in this HBR Classic, most result from a conscious, purposeful search for opportunities. For managers seeking innovation, engaging in disciplined work is more important than having an entrepreneurial personality. Writing originally in the May-June 1985 issue, Drucker describes the major sources of opportunities for innovation. Within a company or industry, opportunities can be found in unexpected occurrences, incongruities of various kinds, process needs, or changes in an industry or market. Outside a company, opportunities arise from demographic changes, changes in perception, or new knowledge. These seven sources overlap, and the potential for innovation may well lie in more than one area at a time. Innovations based on new knowledge, of course, tend to have the greatest effect on the marketplace. But it often takes decades before the ideas are translated into actual products, processes, or services. The other sources of innovation are easier and simpler to handle, yet they still require managers to look beyond established practices. Drucker emphasizes that in seeking opportunities, innovators need to look for simple, focused solutions to real problems. The greatest praise an innovation can receive is for people to say, "This is obvious!" Grandiose ideas designed to revolutionize an industry rarely work. Innovation, like any other endeavor, takes talent, ingenuity, and knowledge. But Drucker cautions that if diligence, persistence, and commitment are lacking, companies are unlikely to succeed at the business of innovation.     

Transforming corner-office strategy into frontline action

When CEOs push decision making out to the far reaches of an organization, good things happen: fleeting business opportunities are seized quickly and workers are motivated to innovate and take risks. But it's tricky to achieve both decentralized decision making and coherent strategic action at a company. If everyone is a decision maker, things can spin out of control. In this article, Bain consultants Orit Gadiesh and James Gilbert explore the concept of the strategic principle--a memorable and actionable phrase that distills a company's corporate strategy into its unique essence and communicates it across an organization. If it's devised and disseminated properly, a strategic principle can empower employees to seize business opportunities but also focus everyone in an organization--executives and line managers alike--on the same strategic objectives. The authors outline the three defining characteristics of a good strategic principle--it should force trade-offs between competing resource demands, it should serve as a test for the strategic soundness of a particular action, and it should set clear boundaries for employees to operate within even as it grants them freedom to experiment. They explain how managers can create a strategic principle, how they should test it, and when they should revisit it. The authors present real-world examples of how companies use their strategic principles. For instance, they describe how South-west Airlines stopped flying to Denver after it measured the high costs of providing flight service in that part of the country against its strategic principle of offering customers short-haul air travel at fares competitive with the cost of automobile travel. This tool is increasingly useful in today's rapidly changing business environment, the authors conclude, and it is likely to become even more crucial to corporate success.     

When winning is everything

In the heat of competition, executives can easily become obsessed with beating their rivals. This adrenaline-fueled emotional state, which the authors call competitive arousal, often leads to bad decisions. Managers can minimize the potential for competitive arousal and the harm it can inflict by avoiding certain types of interaction and targeting the causes of a win-at-all-costs approach to decision making. Through an examination of companies such as Boston Scientific and Paramount, and through research on auctions, the authors identified three principal drivers of competitive arousal: intense rivalry, especially in the form of one-on-one competitions; time pressure, found in auctions and other bidding situations, for example; and being in the spotlight--that is, working in the presence of an audience. Individually, these factors can seriously impair managerial decision making; together, their consequences can be dire, as evidenced by many high-profile business disasters. It's not possible to avoid destructive competitions and bidding wars completely. But managers can help prevent competitive arousal by anticipating potentially harmful competitive dynamics and then restructuring the deal-making process. They can also stop irrational competitive behavior from escalating by addressing the causes of competitive arousal. When rivalry is intense, for instance, managers can limit the roles of those who feel it most. They can reduce time pressure by extending or eliminating arbitrary deadlines. And they can deflect the spotlight by spreading the responsibility for critical competitive decisions among team members. Decision makers will be most successful when they focus on winning contests in which they have a real advantage--and take a step back from those in which winning exacts too high a cost.     

Solve the succession crisis by growing inside-outside leaders

In his analysis of 1800 successions, Harvard Business School professor Bower found that companies performed significantly better when they appointed insiders to the job of CEO. Other researchers, including Jim Collins in Good to Great, have come to similar conclusions working from different data sets. Yet Bower finds far too many companies have no succession plans; as a result, when the time comes to name a new chief executive, more firms turn to outsiders. Both insider and outsider CEOs have strengths and weaknesses at the start. Insiders know the company and its people but are often blind to the need for radical change. Outsiders see the need for a new approach but can't make the necessary changes because they don't know the organization or industry sector well enough. What companies must do, then, is find a way to nurture what Bower calls inside-outsiders--internal candidates who have outside perspective. Often such executives have spent much of their time away from the mainstream of the organization, and away from headquarters, living with new opportunities and threats. Before becoming CEO, Procter & Gamble's A.G. Lafley, for instance, worked for years building P&G's Chinese cosmetics operation rather than the core detergent business. IBM's Sam Palmisano was a champion of software and open systems at a time when Big Blue was essentially a closed-system, hardware-oriented company. Nascent inside-outsiders should enter the CEO-training process by the time they are 30 and be given the opportunity to manage a whole business, so that they become good insiders. But they also need to be mentored with an eye toward preserving their outsider perspective, so they learn how to turn their new ideas into great businesses and are protected from old-timers who might be inclined to teach them a lesson.